Costa Rica: GDP grows at softest pace in a year in Q1
Growth moderated in the first quarter, with GDP expanding 6.0% on an annual basis (Q4 2021: +9.3% year on year). Q1’s reading was the worst since Q1 2021.
Private consumption growth slowed to 5.8% in Q1 (Q4 2021: +8.8% yoy), affected by rising inflation and the country’s worst Covid-19 wave to date. In contrast, fixed investment growth picked up to 22.6% in Q1, from the 13.9% increase logged in the prior quarter, marking the strongest expansion in nearly 15 years.
On the external front, growth in exports of goods and services slowed to 14.4% in Q1, marking the worst result since Q1 2021 (Q4 2021: +17.3% yoy). Meanwhile, growth in imports of goods and services waned to 22.4% in Q1 (Q4 2021: +27.1% yoy).
Turning to Q2, the economy likely cooled further. Although it has been relatively insulated from the fallout from the Russia-Ukraine war, global commodity price spikes have nevertheless affected Costa Rica. As a result, inflation has accelerated, reaching its highest rate in 13 years in May and likely denting private spending in turn. In response, the Central Bank accelerated its tightening cycle: It has raised the key interest rate by a cumulative 300 basis points since March. This is expected to have stifled investment.
The external sector should have benefited from higher commodity prices. That said, trade growth will have suffered as a result of a cyberattack on key government institutions—including the Customs Department—in May. It is not yet clear if the effects of these attacks will carry over into subsequent quarters.
Meanwhile, government debt stood at 68% of GDP in 2021, with fiscal consolidation being a key priority for President Chaves—who assumed office in May 2022—as he seeks funding from IMF development programs. This bodes poorly for growth in government spending in the medium term.
On the key drivers of growth in 2022, analysts at the EIU noted:
“We believe that real GDP growth will be driven this year by investment, exports and private consumption. Costa Rica will also benefit from firm external demand for several of its major exports, such as medical supplies and agricultural products (including pineapples and bananas), and, more importantly, from a normalisation of tourism flows.”